Work-in-Progress (WIP) Accounting for Construction: How to Get It Right
What WIP accounting is, how the percentage-of-completion method works, how to calculate percentage complete and earned revenue, over- and under-billing, holdbacks and change orders, and why lenders and sureties depend on a clean WIP schedule. Written by a licensed Canadian CPA who works with contractors.
Work-in-progress accounting tracks the costs incurred and the revenue earned on each construction contract as the work is performed, instead of waiting until the job is finished. Under the percentage-of-completion method, percentage complete equals costs to date divided by total estimated cost, and earned revenue equals the contract value times that percentage. The WIP schedule then compares earned revenue to what has actually been billed, revealing over-billing and under-billing on every active job. It is the single most important report in construction accounting.
Why Construction Needs WIP Accounting
In most businesses revenue recognition is simple: you deliver, you record the sale. Construction does not work that way. Projects stretch across months or years, costs accumulate unevenly, and clients are billed on negotiated schedules that rarely line up with actual progress. Waiting until a job is complete to recognise revenue would make your interim financial statements meaningless. WIP accounting solves this by tying revenue to the progress of the work, so you know how each job is really performing while it is still in motion. It is the foundation of proper construction accounting.
The Percentage-of-Completion Method
The percentage-of-completion method recognises contract revenue and profit as the work is performed rather than all at the end. The most common measure is the cost-to-cost approach, which uses the costs you have incurred relative to the total you expect to spend.
Percentage complete = Costs incurred to date ÷ Total estimated cost
Earned revenue to date = Contract value × Percentage complete
Over/Under billing = Earned revenue − Billings to date
The percentage complete drives everything downstream, so it has to reflect real job progress, not billing progress. And because earned revenue is independent of what you have invoiced, the WIP schedule shows the gap between the two, which is where the real information lives.
Anatomy of a WIP Schedule
A WIP schedule lists every active contract and reconciles the following, job by job. It is the report your accountant, your lender and your surety all look to first.
| Component | What It Means |
|---|---|
| Contract value | Total revenue including approved change orders |
| Costs incurred to date | Direct and allocable indirect costs on the job so far |
| Estimated cost to complete | Best estimate of remaining costs to finish |
| Total estimated cost | Costs incurred plus cost to complete |
| Percentage complete | Costs incurred ÷ total estimated cost |
| Revenue earned to date | Contract value × percentage complete |
| Billings to date | Amount actually invoiced to the client |
| Over/Under billing | Revenue earned less billings to date |
A Worked Example
Take a contract worth one million dollars with a total estimated cost of eight hundred thousand. You have incurred three hundred thousand of cost so far.
- Percentage complete: $300,000 ÷ $800,000 = 37.5%.
- Earned revenue to date: $1,000,000 × 37.5% = $375,000.
- Compare to billings: if you have billed $300,000, you are under-billed by $75,000; if you have billed $420,000, you are over-billed by $45,000.
That single comparison, earned versus billed, tells you whether you are financing the client out of your own pocket or sitting on cash you have not yet earned.
Over-Billing and Under-Billing on the Balance Sheet
Because billing schedules almost never match progress exactly, the WIP schedule produces two positions that belong on the balance sheet.
| Under-Billing | Over-Billing | |
|---|---|---|
| What it means | Earned more than you have billed | Billed more than you have earned |
| Balance sheet | Contract asset (costs and estimated earnings in excess of billings) | Contract liability (billings in excess of costs and estimated earnings) |
| Cash effect | Ties up your working capital | Boosts short-term cash |
| The risk | Delayed billing, disputes, unapproved change orders | Future billings lag the work; do not spend it as profit |
Neither position is inherently good or bad, but both need watching every month. Chronic over-billing builds a liability you will work off without matching cash coming in; heavy under-billing quietly drains your working capital.
Holdbacks and Change Orders
Two construction-specific items shape the WIP schedule. Holdbacks, typically ten percent in Ontario under the Construction Act, are included in contract revenue when the revenue is earned under percentage-of-completion, but shown separately on the balance sheet as retainage. Holdback does not defer revenue recognition. Approved change orders are added to the contract value, changing percentage complete and earned revenue, so they must be captured as soon as they are approved, while pending ones are treated conservatively. Our guide to holdback accounting in construction covers the holdback side in detail.
Expected Losses: Recognise Them Immediately
Under ASPE 3400, if a contract is expected to result in an overall loss, the entire estimated loss is recognised immediately, even if the job is only partly complete. You do not spread the loss over the remaining work. A disciplined WIP schedule surfaces a projected-loss job early, so it is recognised correctly and you can act on it before it does more damage.
The Estimate to Complete Is the Number That Matters Most
The estimated cost to complete is the most sensitive figure on the whole schedule, because a small change in it moves percentage complete, earned revenue and expected profit all at once. That is why the WIP schedule cannot be a set-and-forget spreadsheet. It has to be updated monthly, ideally in a review where each project manager confirms whether the cost-to-complete estimate still holds and whether anything on site has changed. Without that feedback loop, the schedule drifts into fiction.
The WIP mistakes we prevent: recognising revenue from invoices instead of progress, failing to update the estimated cost to complete, not reconciling the WIP schedule to the general ledger, inconsistent change-order documentation, and mixing project-level with company-level reporting.
Book vs Tax, and Why Lenders Care
ASPE 3400 governs how you present WIP and revenue on your financial statements, but the CRA has its own rules for tax recognition of construction revenue, and in limited circumstances a different method may apply for tax, which can create differences between book and tax income and some planning opportunities. Separately, sureties and banks rely on a clean, well-presented WIP schedule to judge your financial health and how much work you can safely take on, so the schedule is often essential to getting bonded or financed. We coordinate the WIP schedule with your bookkeeping and corporate tax so the books, the tax and the surety package all line up.
Case Study: General Contractor, Ontario
A contractor pursuing a larger bonding program was billing on a fixed monthly schedule with no WIP reporting, so nobody could tell which jobs were making money. We set up job costing and a monthly WIP schedule, calculated percentage complete and earned revenue on every active contract, and presented the over- and under-billing positions correctly on the balance sheet. One job was quietly running toward a loss, which we recognised immediately as ASPE requires, and two others were badly under-billed, freeing cash once billing caught up. The surety got clean, credible schedules and the bonding program went through. The figures here are illustrative of the work we do, not a specific client file.
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